A look at the pros and cons of the two residential property types

Q: In England and Wales, what is the difference between buying a leasehold versus a freehold property, and are there any tax advantages of one over the other?

Time and flexibility are the key differences between the two. “Leases are for a finite term, whereas freehold is forever,” said Helen Marsh, residential real estate partner at Forsters, a London law firm.

Most houses (but not all) in England are owned on a freehold basis, and apartments are usually leaseholds, said Laura Conduit, senior associate and property specialist at Farrer & Co, a law firm in London. Leases in new-build apartments typically start at 125 or 999 years, she said.

Apartment leases generally can be extended for 90 years, with a one-time premium payment. This extension can be done any time after two years of registered ownership, but it usually occurs when the lease still has more than 80 years left, she said. Once it falls below 80 years, “it becomes much more expensive to extend due to the valuation calculations set out in the legislation [because] an element known as marriage value kicks in,” Ms. Conduit explained.

Freehold is clearly preferable for owners, Ms. Marsh added, because you have more control over what you can do to the property.

With a leasehold property, “the lease is the contract between the landlord and tenant and governs matters such as building insurance, repair and maintenance of structural parts, decoration and maintenance of common parts,” utilities and service charges, Ms. Conduit elaborated.

Because leases are of finite length, they are considered wasting assets, “so every day they are worth slightly less than the day before,” Ms. Marsh said. The fewer the years left on the lease, the more it will cost to extend it.

For both freehold and leasehold properties, Dunnell added that the following taxes would apply:

Although neither leasehold nor freehold offers a tax advantage over the other, Patrick Harney, partner, head of private client at Forsters, offered one observation:When property with fewer than 50 years remaining on its lease is sold, “the tax issues become much more complex as they are considered to be wasting assets for U.K. capital gains tax purposes.”